As China's Economy Withers, Reform May Bloom Again

Instead of enjoying their last years, 87-year-old Deng Xiaoping and China's other aging leaders find themselves scrambling to preserve their endangered legacy. The state sector of the economy, a major slab in the Communist Party's power base, is faltering badly--and it could drag the party down with it. The desperate need to come up with a rescue strategy has given economic reformers a new shot at power in the midst of the struggle over the succession to Deng.

The man with the greatest opportunity is Vice-Premier Zhu Rongji, whom Deng tapped in mid-September to try to straighten out the state companies. Zhu, a former mayor of Shanghai, is fondly remembered by the Western business community for singlehandedly solving the foreign exchange problems plaguing the Beijing Jeep joint venture in the mid-1980s. He is known as "one-chop Zhu" for his quick decisions. If Zhu gets good marks in his new role, he could succeed the unpopular Li Peng as Prime Minister next year, putting him in line to head the party. Zhu has one rival, Vice-Minister Hu Qili, a slick politician, who also is trying to turn the public sector around. But these ambitious reformers won't have an easy time. Chinese consumers are in the habit of shunning shoddy public-sector goods in favor of wares from the fast-growing private sector. They turn up their noses at panty hose that sag, bottle caps that don't screw on right, and car designs that never change. Stockpiles of unwanted cameras and TVs are filling warehouses.

Each year, the financially strapped government has to pump more money into the public sector to keep it going. Analysts say that 70% of large state enterprises are losing money, and the cumulative public-sector debt is at least $50 billion. But subsidies aren't enough to save the public sector. Because of its inefficiency and private enterprise's growth, the state-controlled portion of gross national product has shriveled from 60% to 45% since 1989.

How to revive state enterprise is a subject of fierce debate among the Chinese leadership. Zhu and Hu want to fold some of the money-losers into the few successful state companies. And they would like to shut down some laggards to teach poor-performing managers a lesson.

Zhu's ideas are being put into practice on a limited scale. The government recently halted production on some lines in Shanghai, Beijing, and Nanjing that were notorious for turning out inferior stuff. Innovative officials in one province brought in Japanese managers to streamline a light bulb factory by firing workers and linking pay to output.

BIG SPENDERS. But the old guard is not ready for radical solutions across the board. They fear that large-scale layoffs at the state companies could lead to unrest among the 100 million workers these operations employ. Another problem is that too much reform would undermine the Communist Party. "That's why they are wary of economic reform," says a diplomat.

At the same time that a few companies are being closed, the government is spending big to shore up others. Some $1 billion has been earmarked to purchase foreign equipment to upgrade state factories, and big write-offs of public-sector debt may be in the works.

But the reformers have gotten their feet back in the door after being out in the cold since the 1989 Tiananmen Square massacre. If they score big in one or two test cases, the reformers' influence will increase. And they will be in place to fill the vacuum as the gerontocracy fades from the scene.

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